There is no US consumer recovery...implications for China

Last week's Flow of Funds report from the US Federal Reserve showed that US total credit expansion, or the relative lack of it, continued to disappear down the plughole despite the government's mighty efforts to put the country back on the path to prosperity (see chart below).

The current recovery, based in very large part to manufacturers starting to ramp up their inventories, simply cannot be sustained while credit is disappearing at this debilitating rate.
















The recently released Q4 Flow of Funds data allowed economists to get a full view of the 2009 data. It was ugly. Most shockingly, the household sector shrank its borrowing for the seventh quarter in a row.

Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row. The government's creation of credit, or stimulus, as big as it has been is barely propping up the whole economy overall.

Now, we might be getting used to such news, but it is always worth remembering that, prior to the global meltdown, even one quarter of total domestic debt shrinkage was enough to stir the government into rapid response mode with quick relief measures.

The omens are not good for China's exporters. 15 months after the height of the financial crisis, the trend is now clear. US consumers who make up 70% of US GDP are just not in the mood to spend. No wonder the Chinese premier is reluctant to let the value of the yuan appreciate significantly. This will put pressure on the exporters to raise their prices to the buyers and could be the final straw that leads to bankruptcy and spills more unemployed factory workers onto the city streets.

With demand conditions probably permanently stuck in a rut, who dares to prick any of the current China bubbles ranging from property to stockmarkets?